Soft Commodities - OCBC Investment 2018-03-08: Diversity Is A Virtue

Soft Commodities - Diversity Is A Virtue

India raises import tax.

Prefer more diversified WIL.

HPRY acquiring shares.

Mixed bag of performance

During the latest FY17 results, Wilmar International (WIL) reported earnings (US$1.2b) that were better than ours and the street’s expectations, underpinned by good performance in Oilseeds & Grains (good crush margins and stronger sales), as well as strong contributions from JVs and associates (mainly from China, India and Africa).

The internal restructuring of operations for the proposed listing of its China business is now largely completed, and the group also declared full year dividends of S$0.10/share (39% payout), which is 54% higher compared to S$0.065/share in FY16.

Golden Agri-Resources (GAR) was impacted by one-off items such as changes in fair value of biological assets and impairment losses, resulting in full year net profit of US$74.0m. Excluding these, the group’s reported underlying profit was US$253.8m. Full year dividend was 0.809 S cents (30% of underlying profit) vs. 0.635 S cents last year.

CPO prices expected to remain lacklustre

According to OCBC Treasury Research and Strategy, the relatively healthier fundamentals for the palm oil sector seen since the start of 2018 should have lifted crude palm oil prices higher - global supplies led by Asia edged lower, dragged by seasonal factors, while import demand from key importing nations remained robust.

However, the expensive ringgit outweighed these positive factors. The bank is forecasting CPO prices of RM2,487/MT in 2Q18, RM2,443/MT in 3Q18 and RM2,400/MT in 4Q18.

Hike in India’s import tax on CPO

India also recently raised import tax on crude palm oil from 30% to 44% and the tax on refined palm oil from 40% to 54%, which is likely to dent imports of CPO. India mainly imports palm oil from Indonesia and Malaysia, the world’s top producers.

It is expected that the duty hike would narrow the difference between palm oil and soft oils like soy oil and sunflower oil, which is likely to lead to increased demand for the latter two. Pure CPO upstream players are likely to be more impacted by this development in India, whereas more diversified players like Wilmar International which also trades in other oils are likely to be less impacted.

Meanwhile, Wilmar International remains our preferred pick in the sector.

HPRY Holdings, a company wholly-owned by Mr. Kuok Khoon Hong, has also been acquiring shares in Wilmar International recently – a total of about 3.3m shares at an average of S$3.107/share since late Feb.

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